Hiring seen recovering from slump as U.S. rebound entrenched

WASHINGTON — The March setback in hiring will prove temporary as the U.S. economy, in its third year of expansion, now is better equipped to overcome a slowdown in Europe and rising fuel costs, economists said.

Growing sales and profits may give business leaders the confidence to take on staff at a faster clip than last month’s 120,000 gain in payrolls, according to analysts at JPMorgan Chase & Co. and Deutsche Bank Securities. They say the data don’t signal a repeat of 2010 and 2011 — when hiring was derailed after promising starts by concern about government debt, energy costs and natural disasters — even though the total was weaker than all the estimates from 80 economists surveyed by Bloomberg News.

That sentiment isn’t universal, with economists at Bank of America among those projecting employment will slump in the second half of the year as the government prepares to put the brakes on spending to tame the budget deficit. Joseph LaVorgna and Carl Riccadonna at Deutsche Bank counter that income gains will unleash increases in household spending and hiring that will boost job creation by an average of at least 200,000 a month for all of 2012.

“While the economy is going to do OK, we think jobs are going to be doing better than OK,” Bruce Kasman, chief economist at JPMorgan in New York, said Friday following the Labor Department’s employment. “We don’t think today’s number represents the trend,” he said, affirming a forecast that payrolls will rise by 200,000 workers on average for the rest of the year.

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The main reason Kasman, a former researcher at the Federal Reserve Bank of New York, remains optimistic is that gains in revenue will outstrip what may be “modest” increases in wages, meaning companies have incentive to boost employment as sales improve. Additionally, a slowdown in productivity following a surge during the recession means companies may not be able to squeeze more output from current workers, he said.

“It’s much more attractive to hire people right now, to invest in human capital,” said Kasman.

SCVNGR Inc. is among small businesses looking to make such an investment. The developer of applications for smart phones plans to add 17 to 30 employees this year to the 120 already on staff, after hiring 30 at the end of January.

“Our sales have been really great,” Nick Herbold, the company’s head of recruiting, said last week. The Boston-based company was founded in 2008 and is backed by investors including Google Ventures.

“Confidence is increasing” among many clients and customers of Adecco Group North America, according to Janette Marx, a senior vice president at the Melville, N.Y.-based division of Adecco in Glattbrugg, Switzerland, the world’s largest provider of temporary employees.

“We’re seeing a lot of people convert from temp positions to full-time positions across a lot of industries,” she said. “The acceleration really stepped up in the second half of the first quarter.”

The jobless rate unexpectedly dropped to 8.2 percent in March, a three-year low, last week’s Labor Department report showed, as people left the labor force. The participation rate, the share of working-age men and women with jobs or seeking employment, fell to 63.8 percent from 63.9 percent in February.

The smaller-than-forecast payroll figures reinforce Federal Reserve Chairman Ben Bernanke’s repeated cautions that gains might slow as companies adjust their staffs for a period of moderate growth. The central bank has pledged to keep its benchmark interest rate near zero until late 2014 to stimulate expansion.

The report also broke a pattern that was giving U.S. voters a growing sense of security and boosting President Obama as Republican Mitt Romney attacks his economic record.

“Millions of Americans are paying a high price” for Obama’s policies, and “more and more people are growing so discouraged that they are dropping out of the labor force altogether,” the former Massachusetts governor said Friday.

Obama said “we welcome” the added jobs and decline in the unemployment rate, during a forum Friday on women and the economy at the White House. “But, it’s clear to every American that there will still be ups and downs along the way and that we’ve got a lot more work to do.”

Economists at Bank of America are among those concerned that government-mandated spending cuts and tax increases will cause the economy to slump later this year. Ethan Harris, co- head of global economic research for the bank estimates the U.S. faces a “Greek-sized” fiscal tightening in December amounting to about $580 billion, or 3.9 percent of gross domestic product, he wrote in a Jan. 26 note.

Businesses and households will grow increasingly uncertain about the outlook, pondering questions like how long it will take for a lame-duck session of Congress to act, he said.

“As we get toward the end of the year and growth slows, you will probably see job growth slow and consumer spending soften,” Neil Dutta, a Bank of America economist in New York, said Friday. Beginning in the third quarter, employment gains probably will average closer to 100,000 a month from about 175,000 in the first six months of 2012, he said.

Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, is less pessimistic.

“The report was mildly disappointing, but I wouldn’t be that concerned,” said Hoffman, the second most-accurate payrolls forecaster for the two years through February, according to Bloomberg Rankings. “You have to average these things out,” he added, noting that nonfarm payrolls averaged about 211,000 each month in the first quarter.

“It’s not a straight line; it ebbs and it flows,” agreed Mark Zandi, chief economist at Moody’s Analytics in West Chester, Penn. “The job market and the economy are steadily improving.”

Hourly earnings climbed 0.2 percent on average in March after a revised 0.3 percent gain the prior month that was larger than previously estimated, according to government figures. Aggregate incomes, which take into account hours worked and changes in payrolls, probably grew by about 5.6 percent in the first three months of the year, based on calculations by Deutsche Bank senior economist Riccadonna.

“Income growth is positive; that will support consumer spending” and will be “the linchpin of an improving, positive economic-feedback loop,” as rising sales prompt companies to hire, leading to gains in wages that will spur demand further, Riccadonna said in an April 6 interview after the jobs report.

In 2010, the emergence of sovereign-debt concerns in Europe weighed on the U.S. economic outlook. Those same fears resurfaced in 2011, in addition to rising gasoline prices, an earthquake and tsunami in Japan and a budget impasse in Washington. All contributed to a slowdown in hiring in mid-year as employers were reluctant to bring on new workers.

After rising at an average 261,000 pace from February through April of 2011, private payrolls, which exclude government agencies, climbed by an average of 109,000 in the next four months, according to data from the Labor Department.

This year, the economy is rebounding, with growth at 2.2 percent according to the median estimate of 70 economists surveyed by Bloomberg from March 9 to March 13, compared with 1.7 percent last year. The improvement means Fed policy makers can sit back and wait for the monetary stimulus already in place to work without having to do another round of asset purchases, known as quantitative easing, Kasman said.

“The Fed will be very patient here,” he said. With 12.7 million Americans still unemployed, the competition for available jobs will probably rein in wage gains, which “allows the Fed to believe there is a lot of slack that can be eaten up in this recovery,” and policy makers can “let the economy run” by keeping interest rates low.